With the FTSE 100 having experienced its biggest market crash in over a decade, now may not seem to be the right time to buy shares. After all, they could experience further declines in the coming months as coronavirus cases may fail to decline as quickly as expected.
However, in the long run, the FTSE 100’s current price level could prove to be highly attractive. As such, buying dividend stocks today, and holding them over the coming years, could lead to high returns. They could also improve your chances of retiring early.
FTSE 100 dividend stocks are often viewed as being solely of interest to income-seeking investors. However, they’ve historically offered strong total returns. And that could increase the size of your retirement nest egg in the coming years.
In fact, a large portion of the FTSE 100’s historic returns have been derived from the reinvestment of dividends. Doing likewise with the income you receive from your portfolio could lead to a strong growth rate. That’s because investor demand for dividend stocks is likely to increase.
Assets, such as cash and bonds, are set to deliver exceptionally poor returns due to low interest rates. Since the Bank of England seems likely to retain an accommodative monetary policy to support the wider economy in an unprecedented period, bondholders and savers may be unable to obtain returns that match inflation. This could increase demand for dividend stocks. These can pay an above-inflation return today. They may also offer strong dividend growth in the long run too.
At present, a number of FTSE 100 companies have decided to cut, or postpone, their dividends. As such, it may seem as though there’s a lack of opportunities to buy income shares within the index.
However, a range of companies continue to offer generous dividend yields that are covered by their net profits. Therefore, with the index currently yielding around 6%, there are still likely to be opportunities to build an income portfolio that has the capacity to deliver high returns in the long run.
Since in many cases their share prices are likely to have come under pressure since the start of the year, they may offer wide margins of safety. Over time, this can lead to impressive capital returns that increase the size of your retirement nest egg.
Clearly, coronavirus is an ongoing challenge facing the world. It could get worse before it improves, which means dividend stocks may yet experience further falls.
However, the past performance of the FTSE 100 shows that buying high-quality stocks during bear markets has been a worthwhile strategy to generate high returns in the long run. As such, now could be the right time to buy a range of dividend shares and hold them through the likely economic recovery over the coming years.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.